Welcome to the OMV Group's conference call. If you would like to ask a question after the presentation, you may register your request by pressing the star 1 button on your telephone at any time during the actual presentation or during the question and answer session itself. You should have received a presentation by email. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio webcast is available on OMV's website. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates, and assumptions currently held by, and information currently available to OMV.
By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations, and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.
Thank you. Good morning, ladies and gentlemen, and welcome to OMV's earnings call for the 1st quarter, 2022. With me on the call are Alfred Stern, our CEO, and Reinhard Florey, our CFO. Alfred Stern will walk you through the highlights of the quarter and will discuss OMV's financial performance. Following his presentation, the two gentlemen are available to answer your questions. With that, I'll hand it over to Alfred.
Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us today. The 1st quarter of 2022 was dominated by Russia's invasion of Ukraine, an event which substantially impacted markets globally and caused extreme volatility. The war in Ukraine produced a major shock to the world, both from the humanitarian point of view as well as from the supply point of view. Oil and gas prices rallied to new heights as the war and the international sanctions against Russia have impacted supply and raised concerns about supply security.
Following the tragic events, we concluded that Russia is no longer a region where we want to be engaged. We will no longer pursue investments in the country, and we are reviewing exit options for our existing share in the Yuzhno- Russkoye gas field. We no longer buy Russian crude oil for our refineries.
The counter-sanctions announced by the Russian government at the end of February led to the change of consolidation method applied for our Russian operations. As a consequence, as of March first, we no longer include Russia's operational contribution in our KPIs, in the operating result or in our cash flows. Though the Russian volumes represented around 20% of our total oil and gas production, the financial contribution was significantly less and rather limited on a group level. Let me start with a brief review of the market environment. Brent prices increased considerably during the quarter, averaging $102 per barrel, which is 67% higher year-on-year. The start to the year was strong, and by the end of January, Brent reached $90 per barrel, a level not seen since 2014.
Main drivers were a strong recovery of global demand, accompanied by only moderate increase in supply from OPEC+ and the United States. The outbreak of the war in Ukraine led to concerns about supply security, driving Brent prices up further, with intraday highs of more than $130 per barrel. At 101 EUR per megawatt hour, central European gas prices were more than 5x higher compared to the previous year's quarter. Despite the easing of prices in January due to strong LNG inflows, the start of the war in Ukraine caused prices to jump considerably and concerns over a potential supply disruption from Russia kept prices highly volatile. Russia's announcement of demands on ruble payments for natural gas supplies further fueled worries of supply disruptions toward the end of the 1st quarter.
The European refining margin indicator increased from $1.7 in the 1st quarter of 2021 to $9.8 per barrel in the 1st quarter of this year. The refining margin indicator skyrocketed in Romania, in particular, as it is based on Urals, which traded at a substantial discount to Brent due to the voluntary embargoes for Russian crude. The indicator margins for our Western refineries also increased due to improved middle distillate cracks. The cracks reached levels not seen since 2008, primarily driven by worries that Russia, which is a larger exporter of diesel to Europe, would be lost as a supplier in an already tight market. The European olefin indicator margins increased year-on-year with ethylene up 6% and propylene up 23%.
Strong demand in Europe made it possible to pass on rising naphtha costs, and propylene continued to see a tight supply-demand balance. The European polyolefin margins were impacted by higher feedstock costs and a more balanced market compared to the 1st quarter of 2021. The market for polypropylene remains tight, and the polypropylene indicator margin slightly increased year-on-year, while the polyethylene indicator margin declined by 20%. We were able to start the year with a strong financial performance. Our Clean CCS operating result rose sharply to EUR 2.6 billion, and the cash flow from operating activities, excluding net working capital effects, soared to almost EUR 3.4 billion. Looking at operations in the 1st quarter, total polyolefin sales volumes of Borealis and joint ventures were slightly lower. The utilization rate of our European assets was very strong.
Our refineries in Europe ran at 94%, and the steam cracker utilization rate improved to 96%. Our oil and gas production was lower than in the 1st quarter of 2021, primarily due to the change in the consolidation for our Russian operations as of March this year. As a consequence, these volumes will no longer be included in our reporting. An important milestone of our growth strategy in chemicals and materials was reached in February.
Borouge started up successfully the fifth Borstar polypropylene unit in Ruwais, increasing the total polymer production capacity by 11% to 5 million tons per year. At our Capital Markets Day in March, we communicated our new Strategy 2030, which represents a fundamental shift in the company's history. We aim to transform OMV into a sustainable fuels, chemicals, and materials company with a strong focus on circular economy solutions.
We want to become a net zero emissions company for Scope 1, 2, and 3 by no later than 2050. In the framework of our new strategic direction to become a leader in circular economy solutions, we entered into exclusive negotiations with ALBA Recycling to jointly build and operate an innovative sorting plant in Germany. The plant will have the capacity to process 200,000 tons of post-consumer mixed waste per year. The final investment decision will be taken this year. Last but not least, I would also like to briefly bring to your attention the change of the minority shareholder in Borealis announced this morning. ADNOC acquired Mubadala's 25% stake. We are very pleased about our new partner in Borealis.
We have a good and long-standing partnership with ADNOC in the areas of upstream, refining and trading, and in particular with regard to the Borouge joint venture. Let's now turn to our financial performance in the 1st quarter of this year. Our Clean CCS operating result rose sharply to EUR 2.6 billion, an increase of almost EUR 1.8 billion compared with the 1st quarter of 2021, which was still heavily impacted by the COVID pandemic. All 3 business segments contributed to this increase, with the largest contribution coming from exploration and production. The Clean CCS tax rate increased to 46%, which was 19 percentage points higher than in the same quarter last year. This was due to a significantly larger earnings contribution from exploration and production, especially from high-tax regime countries.
Clean CCS net income attributable to stockholders surged to EUR 1.1 billion. Clean CCS earnings per share amounted to EUR 3.27. Let me now discuss the performance of our business segments. The clean operating result of chemicals and materials increased by 32% to EUR 584 million, driven by a substantially stronger contribution of the nitrogen business and an increased performance of polyolefins. The contribution of OMV's Base Chemicals business was lower. Higher ethylene and propylene indicator margins were more than offset by increased feedstock costs and rising power and natural gas prices, as well as higher customer discounts, which were largely recovered in our polyolefin business. The contribution of Borealis, excluding the joint ventures, grew sharply by 73% to EUR 469 million. Supported by a favorable market environment, a strong operational performance, and positive inventory effects.
This increase was fueled by all three businesses, base chemicals, polyolefins, and nitrogen. The polyolefin business saw a strong increase despite slightly lower sales volumes, mostly in the consumer products segment. In contrast to the market indicator margins, the realized margins for both commodity and specialty polyolefins improved. This was driven, on the one hand, by lower feedstock costs due to larger discounts related to monomer prices and, on the other hand, by stronger price increases for certain product categories. The nitrogen business showed an exceptional performance despite the high natural gas prices. Fertilizer prices saw unprecedented highs due to a tight supply situation impacted by the war in Ukraine. The contribution of the Borealis JVs declined to EUR 64 million, mainly due to a one-time pension provision in Borouge.
Despite a significant increase in naphtha prices, the polyolefin prices in Asia rose only slightly as demand was weaker due to COVID lockdowns in China and startup of new capacities. Polyethylene sales volumes from the JVs remained relatively flat, as higher sales volumes in Baystar were offset by lower sales volumes in Borouge due to the planned turnaround of Borouge 1. Polypropylene sales volumes increased slightly, benefiting from the recent startup of the PP5 units at Borouge. The clean CCS operating result in refining and marketing increased by EUR 279 million- EUR 357 million year-on-year, due to substantially higher refining margins, a strong result of Petrom's gas business, and an improved contribution from ADNOC refining and trading.
The positive impact was partly offset by increased crude differentials, higher utility expenses, a lower retail result, and termination of our margin hedges, which contributed positively in 2021. Total sales volumes were up 10%, primarily due to a significant uptick in jet fuel sales. Despite the increase in volumes, the retail business showed a substantially weaker result due to lower fuel margins following the rapid rise of crude prices and the introduction of price caps in several countries. The performance of the commercial business rose slightly year-on-year on account of higher volumes and margins. The contribution from ADNOC Refining and Trading improved from -EUR 25 million to +EUR 20 million, mainly due to higher refining margins and a stronger contribution from ADNOC Trading.
As of January this year, gas marketing Western Europe was transferred from refining and marketing to exploration and production in order to extract synergies from the entire end-to-end gas value chain. In refining and marketing, we are now only reporting the results from Gas and Power Petrom in Turkey. The earnings from this business increased substantially to EUR 148 million, driven by higher gas storage margins in Romania, which were partly offset by a lower power result due to a planned shutdown of the Brazi power plant. The clean operating result of exploration and production rose to almost EUR 1.8 billion from EUR 390 million in the 1st quarter of 2021.
The driving factors were significantly higher realized oil and gas prices, which were partly offset by the negative hedging impact of around EUR 250 million and the change in the consolidation method for the Russian operations. Compared with the 1st quarter of 2021, OMV's realized oil price increased by 64%, thus slightly less than Brent. Our overall realized gas price increased, nearly quadrupled compared with the prior year quarter. About 10% of our gas production benefited from the surge in prices. 10% of the volumes were hedged at EUR 29 per megawatt hour. The remaining 80% of our gas portfolio followed more local prices in the respective markets, where we have also seen increases. However, the increase in gas prices in Romania was partly offset by higher gas taxation, which is based on the CEGH price.
Our production volume decreased by 38 to 457,000 BOE per day, primarily due to the fact that Russian production was only included for 2 months, given the previously mentioned change of consolidation method. In Romania, production was also lower following natural decline. The decrease was partly offset by higher production in the UAE due to revised OPEC restrictions and in Norway. Production cost increased to $7.4 per barrel, impacted by the change in consolidation method of the Russian operations. Sales volumes decreased by 6,000 BOE, thus by less than production volumes. The missing contribution from Russia for 1 month was more than offset by higher sales in the UAE and Libya following the lifting schedule, leading to positive operational performance. As mentioned before, gas marketing Western Europe was transferred from refining and marketing to exploration and production.
In the 1st quarter, the gas marketing west business contributed EUR 56 million to the segment results. Turning to cash flow. Our 1st quarter operating cash flow, excluding net working capital effects, amounted to EUR 3.4 billion, thus almost doubled compared with the previous year's quarter. This was driven by high commodity prices and good operational performance, including temporary effects from the tax payment schedule in Norway. Net working capital effects generated a cash outflow similar to previous year's quarter in the amount of EUR 674 million, primarily due to higher oil and gas prices. As a result, our cash flow from operating activities for the quarter amounted to EUR 2.7 billion. The organic cash outflow from investing activities amounted to around EUR 600 million.
The organic free cash flow before dividends for the 1st quarter came in at around EUR 2.1 billion. The inorganic cash outflow from investing activities includes a capital contribution to Borouge 4 of EUR 287 million, as well as cash disposed of in the amount of EUR 208 million related to the change of consolidation method for the Russian entities. Thanks to the excellent free cash flow generation in the 1st quarter, we were able to reduce net debt by around EUR 800 million to EUR 5.2 billion. In the 1 st quarter, OMV incurred non-cash value adjustments of around EUR 2 billion related to the 24.99% share in Yuzhno- Russkoye and the Nord Stream 2 project.
This includes historical currency effects and around EUR 200 million of cash disposed due to the change of consolidation method. Despite the significant value adjustments with an impact of around 2 percentage points, our leverage ratio decreased by 3 percentage points to 18%. This is comfortably below our target of maximum 30%. In addition, we expect to close the divestment of the retail stations in Germany and our Slovenian business this year, with an expected deleveraging effect of around EUR 700 million in 2022. At the end of March 2022, OMV had a cash position of EUR 6 billion and EUR 4.5 billion in undrawn committed credit facilities. Let me conclude with an update of our outlook for this year.
Based on the developments we have seen so far, we now expect an average Brent price around $95 per barrel for 2022. We have also revised our expectation for the average realized gas price to around EUR 45 per megawatt hour for the full year, considering the market developments and excluding Russia from March onwards. Please note that our gas hedges ended in March, and we do not have any hedges in place, neither for gas nor for oil. In chemicals and materials, we confirm our previous estimates for both margins and volumes. Given the extreme market volatility for both crude and product prices, it is difficult to estimate the full year level for the refining indicator margin at this point. We currently expect that the level will be substantially above our previous guidance of $4.5 per barrel.
We reconfirm the estimate for the refinery utilization rate and would like to remind you that the plant maintenance turnaround at our Schwechat refinery started on April 21st and will last about 6 weeks. The previous guidance for the total fuel sales volumes remains unchanged. Commercial margins are expected to be below the level of 2021, and retail margins will be substantially below the level of 2021. In exploration and production, we now expect an average production of around 390,000 barrels per day in 2022, following the change in consolidation method of the Russian volumes.
Russia contributed around 100,000 barrels per day in 2021, and around 70 in the 1st quarter of this year. The production forecast assumes that the force majeure in Libya will be lifted soon and we can increase production to the normal levels of 30,000-35,000 barrels per day. Looking at cash flow in April, Baystar partially prepaid the loan to OMV Group in the amount of about EUR 600 million. The payment was financed through the issuance of two senior notes, which mature in 2027 and 2032 respectively, and are guaranteed by Borealis. The clean tax rate for the full year is expected to be in the high 40s%. Thank you for your attention. Reinhard and I will now be happy to take your questions.
Thank you, Alfred. Let's now come to your questions. I'd ask you to limit your questions to only two at a time, so that we can take as many questions as possible. You can, of course, always rejoin for a follow-up question. Now, let's kick it off with Sasikanth Chilukuru, Morgan Stanley. Please go ahead, Sasi.
Hi, thanks for taking my questions. I had two, please. The first was related to the increase in your guidance for realized gas prices to EUR 45 per megawatt hour. I was just wondering if it was possible to isolate the effect of excluding Russia in this guidance, how much that specifically has added to this increase in realized gas prices? Also related to this, if you can talk about your outlook for gas prices for 80% of your gas portfolio, which is exposed to the local markets, what are you seeing in those markets in terms of the prices where they stand and your expectations over the next three quarters? The second question was more related to the dividend policy of Borealis.
Now that there's a change in the ownership, and I realize this is very, it's extremely short timeframe. Just wondering, should we expect any change in the dividend policy of Borealis? You've paid EUR 175 million this quarter. I was just wondering if you can provide some context to that, whether this is an annual dividend or should we expect more payments in the remaining three quarters?
Sasi, thanks for your question. This is Reinhard speaking. I will take the first one about realized gas prices and hand over for the second one to Alfred. Regarding realized gas prices, the main effect why realized gas prices will go up then also in 2nd quarter will be that there is no hedge effect on gas prices anymore regarding European hub related gas prices. We still had in the 1st quarter of 2022 a remainder of the gas hedges, which now is completely free from 2nd quarter on. You asked for the impact of the Russian gas price on that. Now, the Russian gas price, as we receive it, has always two different levels.
One is 50% on the BAFA price, which is the European export price, and 50% of a domestic price. Now, as we have deconsolidated and are not expecting any cash also to be seen in our numbers going ahead, we will also not look into the valuation of Russian gas prices from the volumes that Yuzhno may still deliver. Which means that this is rather a balanced impact because if we have 50% of higher European prices and 50% of lower domestic prices, we believe that that does not have a significant impact on the change. The major impact on the change will rather be how our other international gas prices develop, be it in Malaysia, in New Zealand or in Tunisia.
Of course, the impact of the European hub-based prices now with all the limitations from hedges falling away.
Okay, thanks, Reinhard. I take the second question on Borealis and the new co-shareholder there. Let me maybe just start forward. We are very excited about this development because as you know, the Borouge joint venture is a very important growth vehicle also in particular with Borouge 4. There we are looking back at a long-standing partnership with ADNOC not just around this Borouge joint venture, but also a partnership in refining and in upstream together with them and with them. We think this strengthens this partnership and will provide a good framework for the joint way forward together.
As it relates to the dividend policy, we have not agreed any changes, and therefore, at this point, the dividend policy will remain the same.
Sorry, just to follow up. The EUR 175 million, is that an annual payment or is it a quarterly payment? Should we expect more in the next three quarters?
Actually, the payments of Borealis dividends are twice a year. We will expect later in this year, potentially, but this of course is depending on the discussions that we'll have with the new 25% shareholder, a second dividend in the second half.
Great. Thank you.
Thanks, Sasi. We now come to Mehdi Ennebati, Bank of America.
Hi. Good morning, everyone with us, I'm sorry, and congratulations for those very strong numbers. Two questions on my side, please. The first one regarding the chemical margin. Clearly you surprised positively this quarter thanks to very resilient chemicals margin in Europe. Can you tell us why polymer prices, you know, remain that strong currently in Europe? Is there any, let's say, change regarding the polymer demand in Europe? Is the polymer demand reacting, you know, to such high polymer prices? And if not, why? Is it still because, you know, you are benefiting from some global supply chain disruption, which makes, you know, the polymer supply in Europe, you know, relatively low, and why should we expect, you know, those global supply chain disruptions to disappear?
Second question about the fertilizer business. Clearly you said, you know, it started doing extremely well, because Russia, you know, is recovering from this market that can get quite interesting and even strategic right now. Do you still intend to sell that business, or not anymore?
Yeah, thank you, Mehdi. Let me try and answer both questions here. Let me start with the chemical margins and describe to you a little bit how we see the market. We do see continued good demand for polyolefins and for olefins in the market. What we also see is higher but still limited imports coming to Europe. Under these market demand conditions, then it was actually possible to pass on the significant cost increases and drive the margins further. That's one part.
We have seen that now also in the beginning of April, in particular for the ethylene and propylene prices that we were able to significantly push this while NAFTA drops down a little bit. Continued strong demand in this market that is wishing to be supplied, right? On the polymer margins, we actually saw a significant price increase now also in the beginning of April with continued strong demand and limited imports. As you probably know also, there is still globally quite an amount of containers that are somewhere stuck on boats and not moving around.
There was a slight improvement of that situation in the beginning of the year, but it's gotten worse again now in the last couple of years, partly connected also to these COVID outbreaks in Asia again. That's one part that there's demand and the supply-demand balance allows to pass on prices. The second piece that I do want to mention is that of course these are indicative margins that we always talk about. Our business is then driven by the realized margins that we make. Here we can benefit from a relatively high specialty percentage. 40% of our volumes are specialty connected that on average have about double the margins of the other business.
This is a stabilizing factor in these things, and we have also seen that in some sectors, good demand into those specialty areas. This is allowing these chemical margins and the chemical business to, in particular the polyolefin business, perform strongly here in the 1st quarter. Your fertilizer question, you are absolutely correct. The fertilizer prices have climbed to a really significant level. If you remember last year, fertilizer market and business was struggling significantly with the fast increase in gas prices, and there was a strong margin squeeze. From the end of last year, it was then possible to pass on those price increases. Partly, this is driven again by a stronger demand.
We see an effort also in the western part of Europe to increase agricultural production to compensate some of the anticipated falling away of exports from Ukraine and Russia, but also lack of fertilizer exports from Russia. Those two things together have led to strong demand supply imbalance that has then allowed to really pass on the gas cost increases, but even expand the margins significantly. As to the strategic direction for OMV and Borealis, here we are quite clear that we will keep the fertilizer business as an asset held for sale. We will continue on our strategic pathway to move into more and more specialty polyolefins and a circular business model.
Thanks, Mehdi. We now move to Henri Patricot, UBS.
Yes. Hi, everyone. Thank you for the update. Quick question on the gas imports from Russia. What's your latest expectation on your ability to keep paying for the gas? You see that the new payment mechanism working out and what's the kind of planning if for some reason you know you're no longer able to import Russian gas in the near future? Thank you.
Yeah. Thank you. Thank you, Henri. Let me try and answer that question. I think important to separate two things. One is the actual gas production and the other one is the gas imports into Austria or Germany. I think the description about the production in Yuzhno- Russkoye was described by Reinhard, so I won't go there again. Concerning the gas imports, what we have done in OMV is we have immediately triggered a gas task force that is looking at the situation on an ongoing basis and putting measures in place in order to mitigate the risks.
What I can say here at this point is that up until today, the gas supplies from Gazprom continued to flow according to our nominations and according to the contract that we have. We also have up until this point paid in euro, but we have received a request from Gazprom to change the payment method, which we have analyzed, and we are currently working on developing a solution how we could go forward in a sanction-compatible way. This I want to make clear. Whatever we do, we will make sure to comply with any sanctions or any regulatory requirements.
Okay. Maybe just one quick follow-up, just in terms of the timing, and when the next payment to Gazprom is due?
Next payment is due in May.
Okay. Thank you.
Thanks, Henri Patricot. Next questions will come from Josh Stone, Barclays.
Yeah. Thanks, Florian Greger, and good afternoon, everyone. Just a question on refining. Clearly distillate prices have been extremely strong. Is OMV seeing that? How much of that are you able to capture? Maybe if you could give us an indication of how refining margins have been trending in the last several weeks and how much of that you're able to capture. Related to that, just curious, you've often been quite active on hedging middle distillates. I presume today there's not enough liquidity on the curve to do that. Maybe if you can make a few comments about any hedging activity. Thank you.
Yeah, Josh, thank you for the questions. I will start on the refining and the prices, and then I will hand over to Reinhard for the hedges. Just that you get a bit of a feel for this, if you look at refining indicator margins for Europe, we have been above. Last quarter last year was already quite high with about $6.3 per barrel. January, February, we started slightly below that level. Then in March, what we saw is a steep increase going up to about $17 per barrel, right? That made for that strong refining indicator margin for the 1st quarter, about $9.8.
What we have further seen, and this is really driven by multiple things in my opinion, one is the supply-demand imbalance. You probably know that Europe imports quite a lot of oil products. Not just oil, but oil products from Russia, in particular, diesel, and middle distillates, heating oil and the like. These imports were reduced while consumers, for example, in heating oil, showed sort of early buying behavior for heating oil and things like this. In April, we then saw further increases in the indicator margins.
I have to say, this is a really quite volatile situation that is driven by multiple factors and is a little bit difficult to predict exactly. That's why we are saying we anticipate it will be significantly higher than our previous guidance of 4.2. The second half of the year is even further away. As I said, the 2nd quarter has started extremely strong.
Yeah. Josh, you have asked about the situation of hedging in middle distillates. Still in 2021, we had quite some hedges in place which contributed to a low double-digit million EUR number each quarter. This was also in the continuation of the year 2020, when many of these hedges actually were put in place because of the disruptions of the market. Now, in this year, the benefits from hedges will be much, much lower because there is, of course, much less liquidity and much less of these hedges in place. This does not mean that we exclude that some hedges could be taken from an operational point of view again, in the future. At the moment, we have very little exposure here.
Also, the impact, positive or negative, will be insignificant for the year 2022 to going ahead.
Got it. Thank you.
Thanks, Josh. We now come to Raphael Dubois, Societe Generale.
Hello. Good afternoon. Can you hear me?
Yes.
Great. Congrats on the results. First question, please. Can you maybe tell us a bit more about how the quarter has started for Borouge sales, having in mind that it's very Asia-oriented? I would like to know if the current COVID restrictions in China are having any detrimental effects on your business lines, please. I will have another question.
Thank you, Raphael. Let me try and answer this question. When you look at the Asian business that we export into with Borouge, then what we have seen in the last couple of months is a slowly rising price environment over the month. Let's say, prices going up, but less fast than one could have expected, with the increase in naphtha prices in raw material costs, in other words. Increasing price environment, and that is driven by some of these issues that you talk about. Some constraints around the demand driven by COVID, but also some additional capacities.
However, when you look then, we did get price increases versus the fourth quarter of last year, both in polyethylene and in polypropylene, prices more or less at the level of last year. With this, since we have ethane as a feedstock, we could benefit from a slight margin expansion.
Great. Thank you very much, Alfred. My second question is on your upstream production. With Russia now deconsolidated, you are already at your 2030 upstream production target of less than 400 KBOE/day. I would have expected that maybe you review your upstream production paths in line with the Russian deconsolidation. What should we expect? Should we rebase your the expectations you gave us earlier this year with a decrease in the Russian production, or will you adjust differently the long-term strategy? Speaking of Yuzhno- Russkoye, can you tell us if you have any update on the dividend that you are supposed to receive in August? Should we count on it or not?
Okay, I will talk about the production targets and Reinhard will take the dividend question. Yes, what we did, Raphael, in the strategy, we had Yuzhno- Russkoye in, as you said. We had Yuzhno- Russkoye in with about 100,000 barrels for 2021. With 80,000 for 2025 and with 40,000 in 2030. Basically the revised targets that we are using now as a consequence from this deconsolidation is for this year 390,000 barrels per day. Going forward for 2025, 370, and for 2030, 350.
Thank you.
Regarding your question, Raphael, on Yuzhno- Russkoye, their dividend. To be honest, we do not have an update these days. Because the reliability and the predictability of what can come as dividend streams from Russia is very opaque. There are some regulations in place that would even prevent some cash flowing from Russia to outside shareholders. So in fact, Gazprom will have to sort out a way to pay it out. Because from the mechanism, otherwise it has to stay in the company, in the Yuzhno- Russkoye company and cannot even be dividended out to Gazprom. Therefore, we trust that there will be a discussion on that.
To be very frank, I'm not counting on it in my cash flow expectations in 2022, because there is too much uncertainty about that.
Okay, thank you very much.
Thanks, Raphael. We now come to Michele Della Vigna, Goldman Sachs.
Thank you very much, and congratulations on the results. I had two questions. The first one is on your cash return to shareholders. You are clearly generating exceptional free cash flow generation. You will soon be almost without debt. I was wondering how can you think about incremental return to shareholders? Would a special dividend be the best way to do it? Are buybacks potentially doable given your current shareholder structure, or that's really impossible to do? How would you think about that given that the environment is proving to be very generous to you and you have a very cash flow generative business?
My second question is on your market margins. We're seeing a lot of pressure from governments in Europe to try to contain prices to the consumer. Do you see that potentially impacting your market margins in Q2?
You think that is manageable with stable margins as we've seen historically? Thank you.
Yeah, thank you, Michele. Let me try and start with the second question. Reinhard will take your first one. On the margin situation, I think what we are seeing is what I believe you are referencing to. If you look at the retail margins that we were able to achieve in the 1st quarter, we had the reduced result in our retail business is really as a result of a squeeze in retail margins that's coming from two different things. One is around the fast rising fuel cost that couldn't be passed on fast enough.
The other piece is actually from some of the countries where we also supply that there's fuel caps in place doing this reducing our capability to pass on some of those things. Of course, we are optimizing that, but there's increasing pressure from consumers around these topics. I believe here in Austria, where we have a significant market for this, the Austrian government has actually chosen a different pathway. They are providing support to lower-income families that are independent, that are not through price caps, but that are actually subsidy support.
I believe that is a very smart way, because we see in all those countries where they put price caps, that the markets become less dependable, and there is partly irrational behavior then going on. So, some of the discussions we'll maintain, but the basic situation that we have, supply constraints, will not go away. That will allow to pass on some of the prices. Michele, your observations about the strength of OMV balance sheet and about the cash flows is absolutely correct. Of course we are very proud of that. We have already at the end of 2021 said that we have in our capital allocation a very clear focus also on returning share value to our shareholders.
We have expressed that in our progressive dividend policy with a big hike of a dividend that we actually will pay out in Q2. Now, when it comes to dividend yield, of course, we have to look into different situations that different companies are. We are currently not in the position to discuss any kind of buybacks for the known reasons of our shareholder structure. However, I would also point you to three things. The first is we are living in times of uncertainty, so it is also not unreasonable that a company also looks for a strong balance sheet.
The second is that, of course, with the strategic growth opportunities that we are currently looking into with our new strategy, this is something that should also on the mid and long-term yield very good profitability and cash flow growth for the company. Thirdly, of course, as I said also some month ago, at the moment, there is the progressive dividend policy in place. I'm not promising anything more, but I'm also not excluding things.
Thank you very much.
Thanks, Michele. Next is, Matt Lofting, J.P. Morgan.
Hi, Jens. Thanks for taking the questions. 2, please. First, coming back to the earlier comments on chemicals and materials, it sounds like the outperformance in realizations and margins through the specialty side of the business was an important lever in the quarter. Could you just talk a bit more about that in terms of some of the key market opportunities that you saw and the extent to which you think that those stronger specialty margins are sustainable when we look forward through the rest of the sort of the year versus transitory around Q1, particularly given that I think from an outlook perspective, your headline polyolefin benchmark guidance hasn't changed for the full year.
Secondly, on gas and sort of the 45 EUR per megawatt-hour assumption for the full year, I know there's a blend of price regimes and inputs within that average. Could you just tell us what you're assuming on European TTF gas pricing for the rest of the year within that 45? Thank you.
Okay. I'll start with the chemicals and materials and the specialty business, and then let's see what we do then, and then your second question. Chemicals and materials in the specialty business, right, when you look at that, about 40% of our polyolefin sales goes into specialty segments. The big specialty segments that we have there is really around infrastructure, which is a big part is wire and cable insulation, and some other parts also into some specialty pipe applications and so on.
In this business area, we have seen good demand and demand growth that is also driven from investment activity into renewable energy generation and into improving the electricity grid across the globe, actually, but also in Europe. We see that this will continue to be a strong trend. You may be aware of one of those very big investment projects in Germany, where they are making those three energy corridors going from the north to the south of Germany for underground electricity cables. That's what you have to imagine there.
What we also see is continued good demand in the areas of healthcare and advanced polymers where the growth from developing the business, but also underlying demand growth is there. The last piece I want to take here is automotive business, which is one of those specialty areas as well. There it may be a little bit less clear how it will go forward because we have actually last year seen this supply limitations from the lack of microchips coming. We saw that there was some improvements in this in the last couple of months, but now there has been another setback due to this Ukraine crisis.
We will then see how this performs going forward. Overall, good market areas with growth, as the pricing situation there is, we'll eventually see some pricing pressure. The pricing mechanism there is really such that it will be significantly more stable than what you see in those indicator margins. Matt, on your second question regarding gas price development in Europe, that's of course a tough one.
There is a belief that we have that there will be a continuity in supply also from Russia, and there is also a belief that there will be moderate measures to slightly reduce the demand in Europe. That leads us to an assumption that overall, we will not see the same high level of gas prices like in the 1st quarter, but only slightly reducing. This means, if we look at the TTF or CEGH hub level, where we have seen prices on average above 100 in the 1st quarter, we would see that over the year goes below 100, but still on a relatively high level.
This is said is a base assumption with all the volatility of decisions from political nature respectively from activities that are coming from political acts of will that is something very hard to predict.
Perfect. Thanks both.
Good, thanks Matt. We now come to Bertrand Hodée, Kepler Cheuvreux.
Hi. Thanks for taking my question, and congratulations for the very strong results and cash flow. Two questions, if I may. I know it's a difficult one, but there is a lot of worries in the market about the financial risk if gas supply were to stop. Have you already committed to sell some of this gas to serve parties on a forward basis? Will you be able to call for force majeure if supplies stop? Can you give us any color about the potential mismatch between, you know, your already agreed cost of supply and your deliveries on a forward basis? Any color on that kind of risk would be helpful.
The second question is, can you disclose the contribution from Russia in Q1 at the operating level or cash flow?
Thanks, Bertrand, for the questions. To your second question, the contribution has been restricted to only two months, and we are not disclosing separately what is the inflow there. You can imagine that this has not been very significant in terms of the results side, as of course there's also a tax payment with that related. We have been now very cautious in any kind of continuation of assumption of what we would take in for the future. Therefore, you can assume that in the way forward, we will, for the reason of deconsolidation, not have any results anymore included in the operating results or in the cash flows that we show.
Regarding your first question about the financial risk, if there would be an interruption of Russian gas supply. Let me put it like that. First of all, we are committed to as far as possible to keep this supply up, but always only under the condition that we can do that in accordance with any kind of sanction law of European sanctions. If there is not a possibility for that, then of course we will not be able to do that. Regarding any commitment to sell already forward, there is a situation where we have a month ahead booking. Of course there is then also month ahead pricing and month ahead hedging with all that.
For instance, if we take gas from the market to also put it in storage, of course, everything that we put in storage, we have already sold, and we have sold it forward to a Q4 or a Q1 or so. This means we are not taking any kind of risk in the way that we are putting gas into the storage and exposing ourselves to the risk of higher or lower prices when we take it out again. In that sense, there is a limited risk position other than maybe regarding a month ahead hedging. If you're talking about force majeure, of course, interruption of gas supply is a force majeure.
Whether it comes from one side or the other side, for us, it is force majeure, and for our customers, unfortunately, then it also will be force majeure. This is something that, of course, needs to be taken into account, in which speed such force majeure declarations can be taken. Of course, that limits significantly our risk.
Thank you.
Thanks, Bertrand. We have two follow-up questions. The first is coming from Mehdi.
Florian Greger, can you hear me now?
Yes, we can.
Okay, perfect. Thanks. Thanks very much. One question or let's say two questions, you know, regarding the chemicals business. From what I understood, you know, April is starting, you know, pretty well. Is it fair to consider that so far, you know, your realized chemical margin in Q2 are above the 1st quarter, given the current market? Second question, regarding, you know, the refining. You have a refining margin indicator. Can you please tell us what is the current level of that refining margin indicator, knowing that in the 1st quarter it was $9.5 per barrel?
I understand that you are doing, you know, a maintenance at Schwechat, meaning that you are not able to capture all of it, but just wanted to have an idea about that level, please.
Mehdi, thank you. On the chemical margins, yes, the way I would describe this now in the 2nd quarter is that it started extremely strong. Still, good demand and some limited supply. What happened there is that the prices actually went up significantly, ethylene over 200 EUR, and also propylene over 200 EUR price increase. At the same time we saw a reduction in naphtha prices, so we'll see a margin expansion coming from this. Of course that will be beneficial to our result. On the refining indicator margins, I would agree with you. I think, as I described, right, beginning of the year, January, February, strong, right?
In March, a significant expansion increase of these margins. Now in April they have increased even more. We are seeing a refining indicator margin for Europe, now for April of around $30 per barrel.
Perfect. Thanks very much, Alfred, for that.
The next follow-up question is from Raphael DuBois.
Great, thank you. Just two quick questions. The first one is on Borouge. In Q4 you received a very large special dividend. In Q1 now you injected some money into Borouge for Borouge 4 expansion. What should we expect in terms of financial flows between Borealis and Borouge for the rest of the year? That's my first follow-up. Second one is on Romania. I understand that new tax terms for offshore gas are circulating. They might still be modified, but from what you have seen so far, can you share with us how they look like compared to what they were prior, and against your expectations for an FID of Neptun Deep? Thank you.
Yeah, thank you, Raphael. Let me start with the second question on Romania, and then maybe Reinhard Florey can help me out on the expectations for the Borouge dividends. On Romania, as you know, right, you have watched us long enough, OMV Petrom has been working long and hard on this very important Neptun Deep project. But we can only make an FID for this project when we have an offshore law that is amended and approved by the government there. This is still not the case. It's correct what you said that there seems to be some movement and a proposal was submitted to the parliament there for reading. We will then see what the further progress is.
Quite honestly, since we have been waiting, this is a great step. We are very excited about it, because this is a good and interesting project, and we would be happy to take an FID on it. However, we need that offshore law approved before we can do so. Since there have been so many delays, I will wait until I have the final confirmation of approval before I celebrate.
Raphael, on the Borouge side, you're right. In Q4 we received a large special dividend, and this special dividend was, to a certain degree, earmarked also as a money to be injected as equity in for the Borouge 4 development. Not all of it, though. Therefore, I'm expecting two things for the rest of the year. First of all, I'm expecting from Borouge as a company continuing dividends, but I'm also expecting that for Borouge 4, there will be again equity injections necessary to the certain degree that the financing is required from the shareholders and cannot be more or less leveraged from the market. The company itself has leveraged itself, which actually leads to this large payout in Q4. I think there is limited additional possibility to further leverage the company.
therefore I'm expecting more or less a balance between what can be paid out as additional dividends, because it's still a very, very well operating company with a good cash flow. On the other hand, of course, also the payouts and the CapEx for Borouge 4 starts now. I would say it's probably a balanced view with a slight bias to some cash inflow for OMV, respectively Borealis from that.
Thank you very much.
Yeah, we now come to the end of our conference call and would like to thank you for joining us. Should you have any further questions, please contact the investor relations team and we are happy to help. Goodbye and have a nice day.
Thank you. Goodbye. Have a great day.
Thank you.
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